Report Explores Who Owns Huawei

Countries wrestling with whether to permit Huawei to participate in building national 5G networks

Huawei
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KIEV, UkraineTwo western academics have examined the issue of Huawei's true ownership in an unclassified analysis paper "Who Owns Huawei," which was obtained by the Washington Free Beacon.

The report comes as an increasing number of nations are wrestling with the issue of whether or not they should permit Huawei to participate in building their national 5G networks as the hardware could give Beijing's Ministry of State Security back door access to secure and sensitive communications.

The two authors, Christopher Balding, an associate professor of economics at Fulbright University Vietnam, and Donald Clarke, professor of law and David Weaver research professor at George Washington University Law School, found that Huawei's true ownership is more convoluted than it is presented.

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The authors show in detail how the label "Huawei" is used to denote the telecom firm as if it were a single monolithic corporation, when in reality it is "an umbrella term covering more than one entity." The operating company that is responsible for manufacturing the company's products and has the greatest number of employees is Huawei Technologies. However, this is not "the entity that talks about itself at the www.huawei.com website and issues an annual report."

The entity responsible for that is a different company called Huawei Investment & Holding Co., Ltd., usually referred to as "Huawei Holding." Holding companies "typically do not have large numbers of employees; they exist as a legal convenience, not to produce things," according to the authors.

The arrangement is a "typically Chinese shell-game with near-zero transparency," as it was described by one intelligence official to the Free Beacon. Huawei Tech is a single-shareholder liability company and is 100 percent owned by Huawei Holding. Huawei Holding has only two shareholders, company founder Ren Zhengfei with "nearly 1.14 percent" of shares and another entity called Huawei Investment & Holding Company Trade Union Committee (Huawei Holding TUC) controlling the remaining 98.86 percent.

Almost nothing is known of Huawei Holding TUC, including what its corporate registration documents and by-laws say, "who makes decisions in its name, or whether in fact it is a union, an intra-union organ (a trade union committee being different from a trade union), or something else entirely going by a misleading name. It is cloaked in opacity," according to the authors.

This raises no small amount of confusion in that the name "Huawei" is used interchangeably by both those both inside and outside of the various entities. That this kind of ambiguity further serves to perpetuate the completely fictitious façade that the corporation is employee-owned and thus not controlled by the Chinese Communist Party or its military arm, the PLA. On the contrary, examining numerous PRC media reports and corporate documents leads the authors to the conclusion:

Employees of companies in the Huawei group do not own actual stock either in Huawei Tech or in Huawei Holding. Instead, they possess, via contract, a kind of virtual stock that allows them a share in the profits. But this virtual stock is a contract right, not a property right; it gives the holder no voting power in either Huawei Tech or Huawei Holding, cannot be transferred, and is cancelled when the employee leaves the firm, subject to a redemption payment from Huawei Holding TUC at a low fixed price. At present, this virtual stock ownership has nothing to do with financing or control. It is purely a profit-sharing incentive scheme. The thick volumes of names and numbers displayed to journalists—paper records, under glass, in a shrine-like setting, at a high-tech company in the 21st century—bear every mark of being a Potemkin shareholder register.

The authors also came to the following conclusions:

  • Huawei calls itself "employee-owned," but the corporate structure that is outlined on the company's website is described by the authors as "misleading" and as a consequence "the myth of Huawei's employee ownership seems to persist outside of China."
  • The Huawei operating company is 100 percent owned by a holding company, which is in turn approximately 1 percent owned by Huawei founder Ren Zhengfei and 99 per cent owned by an entity called a "trade union committee"—on behalf of the holding company.
  • Nothing is known about the internal governance procedures of the trade union committee. Neither the identities of the committee members or trade union leaders is known, nor the procedures as to how they are selected.
  • Trade union members have no right to assets held by a trade union.
  • What have been labeled as "employee shares" in "Huawei" are in fact at most contractual interests in a profit-sharing scheme.
  • Given the public nature of trade unions in China, if the ownership stake of the trade union committee is genuine, and if the trade union and its committee function as trade unionsare generally required to function in China, then Huawei may be deemed effectively state-owned [emphasis added].
  • Regardless of who, in a practical sense, owns and controls Huawei, it is clear that the employees do not.

The concerns with Huawei and who is really in charge become even greater when one examines the background of its CEO, Ren Zhengfei, Ren's bio states that he spent most of his career in the PLA at the force's research institute, where he was a military technologist reportedly attached to the PLA's Information Technology research unit. During his time in the PLA, Ren reportedly held no military rank.

Intelligence officials state that Ren and other senior and founding owners of Huawei were heavily involved in the development of the PLA's electronic warfare capabilities, and that the company continues to serve as a technology arm of the PRC military and intelligence services and a major defense contractor. Indian intelligence agencies produced an assessment in 2013 stating that PRC telecom firms, to include Huawei and ZTE, were the prime vendors in a military project called "PLA-863" that has as one its goals the strengthening of Beijing's electronic warfare capabilities.

One of the more recent worrying developments is how Huawei acts as Beijing's agent of influence and is implicated in intelligence-gathering and infiltration operations in Central and Eastern Europe. The Chinese telecom company has faced little resistance due to a network of local nationals willing to lobby on its behalf.

It was reported this week that Australia's Minister of Foreign Affairs, Marise Payne, had said there will be no change in Canberra's decision to ban Huawei from participating in building any portion of the country's 5G network.

"Countries will make their own decisions, but the position that Australia takes is a very clear one," said Payne. "It's a position which we have taken based on security advice given to us by national agencies. It's not a position that we intend to change."

Recently, Director-General of ASIO Duncan Lewis told the Australian parliament the "current scale of foreign intelligence activity … is unprecedented" and that foreign actors were targeting privileged and classified information on Australia's alliances, partnerships and positions on diplomatic, economic and military issues.

"The grim reality is there are more foreign intelligence officers today than during the cold war, and they have more ways of attacking us," said Lewis. The ASIO head did not list any nations by name but his statement to the parliament coincides with a sharp uptick in concern over PRC espionage operations against Australia.

Australia is one of the "Five Eyes" (FVEY) countries—including New Zealand, the United Kingdom, United States, and Canada—which share signals intelligence and other classified data between partners.